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Why Critical Illness Cover is worth it
By Drew Mitchell
Is life insurance necessary? Many young single individuals would argue not, and with some degree of logic. If you don’t have any dependants or any substantial liabilities then it’s natural to think that there is little need for any life protection, the rationale is quite easy to follow, if you die, you die. It could also be argued that even if you do have significant outstanding debts, for many this would be a mortgage, but have no dependants then life cover is a simple luxury, others might argue that it’s one’s moral obligation to repay your debt to the mortgage lender on your death, to prevent the inconvenience of having to sell the property and to save the administrative burden. Others, I suspect the majority, would not feel so obliged. Either way, it is a choice which affects those that are left behind and does not and cannot impact you personally.
Critical illness cover however, is a complete different beast. The opposite is true, in contrast to the scenario where life insurance would pay out, a critical illness payment will directly affect and benefit you. If you are diagnosed with a life threatening illness, depending on which survey you care to listen to this could range from one in five of us to as little as one in two of us, then this type of cover will pay out a lump sum. The money is tax free and can be used in any way you like – to pay a lump sum off your mortgage, enable you to stop working, or buy private medical care. You decide how much you think you'll need when you take it out, calculations such as dependants future education fees and childcare can be added in along with day to day living costs and existing liabilities.
In the past, these protection policies were less popular as a result of having too much wriggle-room, allowing insurers off the hook when it came to paying claims – and insurers were notoriously secretive about how many claims they let through. Not surprisingly, insurers found critical illness cover increasingly hard to sell, and so have been forced to clean up their act. First, they started to declare how many claims were successful – they say that, on average, more than nine in 10 are now met. Then they increased the number of illnesses and conditions covered. Some covered fewer than 10, but the list now typically covers 40 to 50.
Historically, policies only covered advanced cancers, which meant many early-stage cancers were not covered, but in recent years this has changed. Cancer accounts for almost two-thirds of claims, followed by heart attack, stroke and multiple sclerosis. But it's important to remember that critical illness insurance only covers the conditions laid out in the policy and no others, and your illness must meet the definitions described.
Do I need it?
It is worth first checking what benefits you have through your work. Most employers offer life insurance (which only pays out on death and is only usually three to four times annual salary) and very few include critical illness cover. Experts say you are six times more likely to claim under critical illness than life insurance.
Because a critical illness pay-out has no restrictions on how you can use it, it could be useful to help pay your mortgage, or allow you to go part-time, and generally ease your household finances. This is in contrast to income protection which is generally capped to provide 60% to 70% of your monthly income on a regular basis and you are continually assessed by a medical professional to see when you are fit to return to work and the benefits stopped.
How much will it cost me?
Critical illness is usually added to life insurance, and the cost will depend on your age and medical history. The cheapest policies have the fewest conditions covered and the tightest definitions of when it will pay a claim. You can keep down the cost at the start by going for a reviewable plan. However, the premiums will then be raised every few years, and it could work out more expensive in the long run than a guaranteed plan, which keeps the premiums level throughout.
The cost of £100,000 life and critical illness cover to age 65 for a non-smoker in good health with guaranteed rates would be £26.68 a month with Royal London for a 20-year-old male; £33.36 for a 30-year-old with Legal & General; £55.79 for a 40-year-old with Legal & General; and £97.80 for a 50-year-old through Legal & General.
Since critical illness cover is the most expensive element, you can keep the price down by opting for different levels. So a male with £100,000 life insurance and £50,000 of critical illness cover to age 65, would pay £16.92 a month with Royal London at age 20; £23.36 with Royal London; £34.56 with Aegon at 40; and £58.46 with Aegon at 50.
Examples of cover for a 30 year old, non-smoking male, these are guaranteed monthly premiums for the term up to age 65.
Why are claims rejected?
Two of the most common reasons claims are declined are that they don't meet the definitions covered by the policy and/or that the policyholder allegedly didn't tell the insurer about a previous medical problem.
The Association of British Insurers (ABI) has produced guidelines for providers aimed at making sure the definitions are clear.
Since insurers don't undertake thorough medical checks when they sign you up, it is easy to fall foul of the system accidentally and miss something off your medical history. Even a minor incident in the past could mean insurers refuse to pay.
But claims following innocent or inadvertent mistakes will be met, at least, in part. For instance, last year 1.7% of Aviva's critical illness claims were declined due to non- disclosure and 92.5% were successful.
Earlier this year, Aviva asked customers about their understanding of critical illness cover. It found 45% thought it would cover any critical illness, not just those listed under the plan, this highlights the need to speak to an advisor to ensure you are fully covered and not to just buy a policy online.
Protection is an extremely important element of what Cadence Wealth do, it is fundamental to our business and we ensure that all clients’ life, critical illness and injury protection needs are met before looking at any form of investment or savings structures.